The Great Decisions And Lucky Breaks That Made Microsoft The Most Powerful Company In The World

Microsoft's early days were filled with emergency all-nighters, panicked contract negotiations, and legal tussles. Just like nearly every other startup.

The amazing thing: nearly every break went Microsoft's way.

Microsoft cofounder Paul Allen (lower right) gives his unique inside view on Microsoft's early days in his memoir "Idea Man," which is being released today.

He and Bill Gates (lower left) made a lot of great decisions early on, but the company also had its share of lucky breaks.

We read the book and emerged with several key events that helped Microsoft grow from the scruffy startup pictured here to the most profitable technology company in the world, with 89,000 employees and more than $60 billion in annual revenue today.

It started with a magazine ad.

60 Minutes CBS

In 1974, Allen was taking time off from college and living in Massachusetts near his friend Bill Gates, trying to figure out how to make a career in programming. He saw an ad for a new kind of microcomputer called the Altair 8080. He showed the ad to Gates, and the two of them immediately thought they could take the programming language BASIC and adapt it for the Altair.

They bluffed their way into their first contract.

AP

Gates had Allen call Ed Roberts, the CEO of MITS, the company who made the Altair, and tell him that they had a version of BASIC almost done. They were bluffing. Roberts called their bluff and said that whoever walked through the door with a working version of BASIC first would get the contract. Gates and Allen worked like crazy for 8 weeks, then Allen flew out to Albuquerque and presented their version of BASIC to Roberts. It worked, and they got the deal.

A well-written contract helped them win a critical case in court.

Wikimedia

Gates and Allen guessed that the Altair might not be the last word in microcomputers, so the pair made sure to keep the rights to license their BASIC language to other computer makers as well.

When the Altair started to falter, Ed Roberts got desperate and canceled a couple contracts to sublicense BASIC. Then, he decided to sell MITS to another company called Pertec, which thought it was also buying all rights to BASIC for the Altair, including the source code. Microsoft suddenly found its only source of revenue in danger.

Fortunately, there was an out. Back when Microsoft signed its deal with MITS, Gates had a lawyer draw up the contract with a clause that required MITS to promote Microsoft's software to the best of its abilities -- or the contract would become void.

According to Allen, Roberts never read the contract before signing it.

Microsoft won a complete victory, and got all the rights to its BASIC interpreter, including the right to sell it to anybody and keep 100% of revenue.

Microsoft hooked up with Japan very early.

Even when it was a tiny startup, Microsoft paid a lot of attention to Japan, where microcomputing was exploding. The company hired a flamboyant sales manager named Kay Nishi, who won a big contract with NEC in 1979. Allen and Gates followed up with numerous business trips to Japan, and Japanese execs regularly dropped off new 8-bit computers at Microsoft's new headquarters near Seattle -- some of them also tried to snap clandestine photos of competitors' machines.

Japanese contracts helped Microsoft become the undisputed leader of software languages for microcomputers by the early 1980s. But Gates smartly resisted calls to become the exclusive partner of a Japanese company like Sony -- he wanted to keep licensing BASIC as widely as possible.

The company turned down a buyout offer from Ross Perot.

AP

In 1979, Microsoft got a buyout offer from billionaire Ross Perot, who had previously founded data processing giant EDS and now had a company called Perot Systems. Gates rejected it, writing Perot that he thought Microsoft would be able to double its revenue to more than $2 million (yes, million) in 1980. Microsoft actually surpassed that mark with $2.4 million in sales.

After the company moved to Seattle, Allen took a meeting with a programmer named Tim Paterson.

Microsoft was doing well licensing BASIC for 8-bit computers, but the company was convinced the future lay in 16-bit computing. In 1979, Paul Allen took a call from a designer named Tim Paterson, who had designed a prototype 16-bit computer. The collaboration wasn't all that important, but it paved the way for what came next.

Big Blue came calling.

By 1980, IBM decided it could no longer ignore the microcomputer market, and decided to make a fast entry by partnering with younger companies. A group of IBM executives secretly called on Microsoft to deliver 16-bit versions of BASIC and other programming languages for the upcoming IBM Personal Computer -- the first PC.

IBM also asked Microsoft for a recommendation on somebody who could deliver a 16-bit operating system. Microsoft sent them to Digital Research, based in Santa Cruz, which was reportedly almost done with a 16-bit version of its CP/M operating system.

Digital founder Gary Kildall was out flying his plane, so IBM went back to Microsoft for an OS.

In a story that has become part of computing legend, when IBM visited Digital Research, its leader Gary Kildall was out flying his plane. (Allen confirms the story, but says that Kildall was flying on business, not just joyriding.) Kildall's wife and business partner Dorothy took the meeting, but refused to sign IBM's non-disclosure agreement and asked IBM to sign a Digital contract instead.

IBM came back to Microsoft saying they couldn't work with Digital -- the legal paperwork would take too long to complete. Instead, IBM asked if Microsoft could build a 16-bit OS on its own.

Microsoft licensed an operating system from Seattle Computer for cheap.

Allen recalled his meeting with Tim Paterson from Seattle Computer. Patterson told Allen that he had "cobbled together" (in Allen's words) a 16-bit OS called Quick And Dirty Operating System, or QDOS.

Gates -- who was furious that Gary Kildall had placed the IBM PC project in jeopardy -- didn't want to sign a deal at first, but eventually he realized they could lose the entire contract if IBM couldn't find an operating system. So Microsoft reached an agreement with Seattle Computing president Rod Brock to pay $10,000 plus $15,000 for each licensee -- a total of $25,000.

In 1981, Microsoft went back and bought the whole operating system from Brock (Allen doesn't disclose the terms). Seattle Computer later sued Microsoft for a bigger share of the pie. Allen says that Microsoft settled because they were worried about the uncertainty of a jury trial.

Microsoft made sure they kept the rights -- and IBM agreed.

Microsoft knew from its early experiences with the Altair and BASIC that it couldn't become too dependent on one company. So when it signed the IBM contract for DOS, Microsoft gave up per-unit royalties in exchange for the right to license DOS to any company who wanted it.

IBM, which was in the middle of antitrust litigation at the time, gladly accepted the contract and paid Microsoft $430,000 for the OS plus consulting fees.

Later, Microsoft would license DOS to dozens of manufacturers of IBM PC clones. Those licensing deals became the bedrock of its operating system business.

Allen realized early on that a computer also had to have great apps.

In 1979 -- before the IBM deal -- Allen was at a trade show in New York and saw a piece of accounting software called VisiCalc, which ran only on the Apple II. Allen realized that VisiCalc would help Apple sell a ton of computers, and created a piece of hardware that would let Microsoft software to run on Apple computers as well.

But equally important, he realized that personal computers would never become popular unless they had a graphic interface and useful apps.

A great hire from Xerox PARC showed Microsoft how to design the future.

In 1980, a frustrated researcher from Xerox named Charles Simonyi contacted Microsoft because he wanted to get into product development. Allen looked at his resume and was blown away: Simonyi had been working at Xerox's famed research lab, which invented the graphical user interface, the mouse, and the laser printer. Microsoft hired Simonyi, who went on to develop the products that later became Office -- Microsoft's second massive business.

Simonyi got 1.3% of the company and left Microsoft as a wealthy man in 2002. He later became the first space tourist, paying the Russian space agency more than $20 million for two flights in 2006 and 2008.

Here's Microsoft today.

Baseball-fever

Reading Allen's tale of the scrappy startup days, it's hard to believe where Microsoft stands today. At the end of Microsoft's last fiscal year on June 30, 2010, it had:

89,000 employees.

$62.5 billion in annual sales.

$18.8 billion in annual profits.

$86.1 billion in total assets, including $36.8 billion in cash and short-term investments.

Perhaps most surprising, Microsoft still makes most of its money from operating systems and business software -- two of its earliest product lines.

Windows -- the operating system business -- earned operating profits of $13.0 billion on $18.4 billion in sales

Office and other business software earned operating profits of $11.8 billion on $18.6 billion in sales.